Question

Siemens’ Simple Structure–Not

There is perhaps no tougher task for an executive than to restructure a European organization. Ask former Siemens CEO Klaus Kleinfeld.

Siemens, with 77 billion Euros in revenue in 2008, some 427,000 employees, and branches in 190 countries, is one of the largest electronics companies in the world. Although the company has long been respected for its engineering prowess, it’s also derided for its sluggishness and mechanistic structure. So when Kleinfeld took over as CEO, he sought to restructure the company along the lines of what Jack Welch did at General Electric. He has tried to make the structure less bureaucratic so decisions are made more quickly. He spun off underperforming businesses. And he simplified the company’s structure.

Kleinfeld’s efforts drew angry protests from employee groups, with constant picket lines outside his corporate offices. One of the challenges of transforming European organizations is the customary active participation of employees in executive decisions. Half the seats on the Seimens board of directors are allocated to labor representatives. Not surprisingly, the labor groups did not react positively to Kleinfeld’s GE-like restructuring efforts. In his efforts to speed those efforts, labor groups alleged, Kleinfeld secretly bankrolled a business-friendly workers’ group to try to undermine Germany’s main industrial union.

Due to this and other allegations, Kleinfeld was forced out in June 2007 and replaced by Peter Löscher. Löscher has found the same tensions between inertia and the need for restructuring. Only a month after becoming CEO, Löscher was faced with a decision whether to spin off the firm’s underperforming 10 billion-Euro auto parts unit, VDO. He had to weigh the forces for stability, which want to protect worker interests, against U.S.-style pressures for financial performance. One of VDO’s possible buyers is a U.S. company, TRW, the controlling interest of which is held by Blackstone, a U.S. private equity firm. German labor representatives have derided such private equity firms as “locusts.” When Löscher decided to sell VDO to German tire giant Continental Corporation, Continental promptly began to downsize and restructure the unit’s operations.

Löscher has continued to restructure Siemens. In mid- 2008, he announced elimination of nearly 17,000 jobs worldwide. He also announced plans to consolidate more business units and reorganize the company’s operations geographically. “The speed at which business is changing worldwide has increased considerably, and we’re orienting Siemens accordingly,” Löscher said.

Since the switch from Kleinfeld to Löscher, Siemens has experienced its ups and downs. Since 2008, its stock price has fallen 26 percent on the European stock exchange and is down 31 percent on the New York Stock Exchange. That is better than some competitors, such as France’s Alcatel-Lucent (down 83 percent) and General Electric (down 69 percent), and worse than others, such as IBM (up 8 percent) and the Swiss/Swedish conglomerate ABB (down 15 percent).

Though Löscher’s restructuring efforts have generated far less controversy than Kleinfeld’s, that doesn’t mean they went over well with all constituents. Of the 2008 job cuts, Werner Neugebauer, regional director for a union representing many Siemens employees, said, “The planned job cuts are incomprehensible nor acceptable for these reasons, and in this extent, completely exaggerated.”

When asked by a reporter whether the cuts would be controversial, Löscher retorted, “I couldn’t care less how it’s portrayed.” He paused a moment, then added, ““Maybe that’s the wrong term. I do care.”

Questions. ANSWERS SHOULD BE 1500 WORDS

1. What do Kleinfeld’s efforts at Siemens tell you about the difficulties of restructuring organizations?
2. Why do you think Löscher’s restructuring decisions have generated less controversy than did Kleinfeld’s?
3. Assume a colleague read this case and concluded “This case proves restructuring efforts do not improve a company’s financial performance.” How would you respond to this statement?
4. Do you think a CEO who decides to restructure or downsize a company takes the well-being of employees into account? Should he or she do so? Why or why not?

Answer 1

Answer 1. It is difficult to restructure the firm because restricting may lead to loss of profitability, consent of every stakeholder, refinancing, cost involved, etc. since it involves consent of all the stakeholders namely, creditors, employees, shareholders, government, etc. Kleinfeld’s efforts at Siemens to restructure the organisation in order to make it less bureaucratic brought him the trouble to his position and at last he had to leave his job. This made the employees to rebel against him. Therefore, one of the major difficulties faced was the protest of trade union. The support of trade union is required.

Answer2 the Loscher’s restructuring was less controversial because he made it step by step and the workers did not allege him with the allegation that the workers have put on Kleinfeld. Therefore, it is important to introduce any change systematically.

Answer3. A well planned, communicated and well implemented restructuring always gives a positive result. It is the responsibility of the CEO to plan the restructure properly and discuss it with the stakeholders. Ask for the suggestion and then prepare a strategy to formulate the restructuring. It is always better to plan than to default at implementation. There are some successful restructures which have actually bear some fruits. Therefore, it should be implemented whole heartedly and with a lot of planning.

Answer 4. Some restructuring requires the downsize of the organisation. Then that decision is taken at the cost of employees. That CEO is considering the organisation’s well being and thus the employees, who are human capital of the company, are being ignored. Therefore, the CEO must always try to eliminate the risk of losing job by employees. He or she should always consider employees before taking this decision. If it temporary to remove the employees then appropriate compensation should be given. If it is a permanent one, then compensation should be given otherwise they could do strikes, etc. therefore the department should negotiate with the employees.